‘Pollution Party’ Over as Europe Agrees to More Strict Emissions Trading System

European Union mem­ber gov­ern­ments have agreed on a sig­nif­i­cant reform of the car­bon credit mar­ket to slash the bloc’s green­house gas emis­sions.

The reform pack­age for the Emissions Trade System (ETS) comes after months of tough nego­ti­a­tions, which resulted in a sub­stan­tial expan­sion of the once-lim­ited sys­tem to energy-inten­sive and power-gen­er­at­ing indus­tries.

Once the reform is rat­i­fied by the European Parliament and each of the 27 mem­ber states, it will be avail­able for almost all eco­nomic sec­tors.

According to a note from the European Parliament press office, the ETS embod­ies the ​“pol­luter pay” prin­ci­ple, allow­ing com­pa­nies to invest in car­bon cred­its to off­set their emis­sions.

“By putting a price on green­house gas emis­sions, the ETS has trig­gered sig­nif­i­cant reduc­tions in E.U. emis­sions, as indus­tries have an incen­tive to reduce their emis­sions and invest in cli­mate-friendly tech­nolo­gies,” the par­lia­ment wrote.

The reformed ETS aims to reduce emis­sions in all sec­tors by 62 per­cent by 2030. A sep­a­rate ETS will start oper­at­ing in 2027 and involve the remain­ing sec­tors, specif­i­cally con­struc­tion and road trans­port.

For the first time, sec­tors such as mar­itime trans­port or home heat­ing equip­ment will be included in the car­bon credit mar­ket.

To meet its goals, the ETS will reduce the avail­abil­ity of car­bon diox­ide equiv­a­lent cred­its in the mar­ket from 2026. By decreas­ing the num­ber of avail­able cred­its, indus­tries will have to increase their invest­ments in the green tran­si­tion to remain com­pli­ant with emis­sions lim­its.

Twenty-four per­cent of all avail­able ETS allowances will be used as a mar­ket sta­bil­ity reserve ​“to address pos­si­ble imbal­ances between the sup­ply of and demand for allowances in the mar­ket due to exter­nal shocks such as those caused by Covid-19.”

The new ETS will also halve the free car­bon per­mits cur­rently avail­able to crit­i­cal sec­tors such as cement, chem­i­cals and steel by 2030.

By 2034, the per­mits will be can­celed, a move that resulted in crit­i­cism from the indus­try. They argue that the end of free licenses will neg­a­tively impact the abil­ity of European sec­tors to com­pete with global peers.

In response, the E.U. has estab­lished two funds for inno­va­tion and mod­ern­iza­tion, totalling €50 bil­lion, to sup­port the green tran­si­tion.

Given the many uncer­tain­ties in the energy sec­tor and its effects on European cit­i­zens, E.U. mem­ber gov­ern­ments have also estab­lished an €86-bil­lion social fund designed to pro­tect the most vul­ner­a­ble por­tions of the pop­u­la­tion from exces­sive price rises.

“This deal will pro­vide a huge con­tri­bu­tion towards fight­ing cli­mate change at low costs,” said Peter Liese, the German law­maker in charge of the ETS report. ​“It will give breath­ing space for cit­i­zens and indus­try in dif­fi­cult times and pro­vide a clear sig­nal to European indus­try that it pays off to invest in green tech­nolo­gies.”

“The free pol­lu­tion party is over; we are send­ing the indus­try on the mod­ern­iza­tion course,” Michael Bloss, a German law­maker from the Green Party, said in a tele­vi­sion inter­view. ​“The worst pol­luters pay extra, and those who decar­bonize are sup­ported.”

The ETS is a cru­cial part of the FitFor55 pack­age approved by the E.U. last sum­mer to reduce the bloc’s emis­sions by 55 per­cent before 2030.

• European Parliament
• Euractiv